Tequila! The (Crisis) Song Plays Again in Mexico

Oh dear, posts about more LDCs taking it on the chin aren't ones I look forward to writing about at all. Still, since it is my solemn duty to inform beloved IPE Zone readers, this freak show must reported even if it makes my stomach churn. Before reading on, cue up The Champs' "Tequila" for this is another blast from the past. Indeed, the so-called "Tequila Crisis" of 1994 is similar in its general features to the crashes now being experienced in debt-swilling countries like the US, UK, and Iceland.

I wish things were going better in present-day Mexico, but some things aren't going too well there, either. Mexico is quite dependent on its huge neighbor to the north as an export market; with the US swooning pretty hard, "decoupling" isn't likely as 80% of its exports are bound for America. Moreover, Mexico's balance of payments are likely to be hurt as remittances from Mexican laborers toiling in Estados Unidos dry up. Adding insult to injury, Bloomberg now reports that the country is busy defending the peso like in the bad old days, selling off reserves to prop up that currency unit. If you look at the chart above, the sudden upward spikes have been tamped down by episodes of Mexican intervention. However, Mexico cannot continue intervening at this rate as its $80-some billion stash can only go so far. Confidence isn't helped either by a large retailer going belly up:

Mexico's central bank sold a record $6.4 billion in the currency market today, stepping up its bid to quell a rout in the peso that threatens to bankrupt companies and ignite inflation in Latin America's second-biggest economy. Banco de Mexico has now sold $8.9 billion in three days, tapping into a near-record $84 billion of foreign reserves, after the peso plummeted to a record low. The peso gained as much as 4.7 percent after today's intervention, reversing an earlier tumble of as much as 6.1 percent. It has plunged 16.5 percent this month as investors sought the safety of U.S. dollars amid the worst financial crisis since the Great Depression.

``These are very extreme conditions,'' said Neil Dougall, head of emerging-market research for Dresdner Kleinwort Group in London. Policy makers ``needed to demonstrate very quickly that foreign exchange was available.''

Central bank Governor Guillermo Ortiz and Finance Minister Agustin Carstens are pumping dollars into the market as part of an effort to prevent the global crisis from eroding the finances of local companies. Controladora Comercial Mexicana SAB, the owner of supermarkets and Costco stores in Mexico, filed for bankruptcy reorganization yesterday after taking losses on currency derivatives.

The $6.4 billion Banco de Mexico sold today is the most in a single day, according to estimates by Gabriel Casillas, an economist with Banco UBS Pactual in Mexico City. Central bankers sold $3 billion in a first auction, $400 million in a second sale and $3 billion in a third auction. They began selling on Oct. 8 after the peso sank as much as 13.8 percent, its biggest intraday decline since the government abandoned a currency peg in 1994.

The peso was up 0.9 percent to 13.1018 per dollar at 1:50 p.m. New York time today, halting seven straight days of losses. It is down 25 percent from a six-year high reached on Aug. 4. The global crisis has caused ``panicking in Mexico,'' said Bertrand Delgado, a Latin America economist with New York-based IDEAglobal Inc. ``The peso is just falling too fast.''

Mexico was forced to abandon its peg in December 1994 after running low on foreign reserves, leading to a six-week, 45 percent plunge in the peso that became know as the ``Tequila Crisis.'' Reserves have since rebounded, almost tripling this decade amid a six-year rally in oil, the country's biggest export. They still ``aren't high enough to sustain'' the amount of dollars the central bank is selling, said Win Thin, a senior currency analyst with Brown Brothers Harriman & Co. in New York.

``Even during the Tequila Crisis, they weren't under this much pressure,'' Thin said. He said he doesn't expect Ortiz to raise interest rates to try to keep money in the country. ``They're running out of options...''

Mexico is bracing for an economic slowdown as the crisis crimps growth in the U.S., the buyer of 80 percent of its exports. President Felipe Calderon sent on Oct. 8 a revised 2009 budget proposal to congress that lowered forecasts for economic growth to 1.8 percent from 3 percent and cut the assumed price of oil exports to $75 a barrel from $80.30. Calderon also proposed the same day a stimulus package worth 1 percent of gross domestic product that includes spending on energy, infrastructure and education to help the crisis.

Mexico hopes for the best, but prepares for the worst.